Bracket creep

Bracket creep is usually defined as the process by which inflation pushes wages and salaries into higher tax brackets, leading to fiscal drag.[1][2][3] However, even if there is only one tax bracket, or one remains within the same tax bracket, there will still be bracket creep resulting in a higher proportion of income being paid in tax. That is, although the marginal tax rate remains unchanged with inflation, the average tax rate will increase.

Most progressive tax systems are not adjusted for inflation. As wages and salaries rise in nominal terms under the influence of inflation they become more highly taxed, even though in real terms the value of the wages and salaries has not increased at all. The net effect is that in real terms taxes rise unless the tax rates or brackets are adjusted to compensate.

  1. ^ "Hidden tax increases - the extra tax burden of the bracket creep and the expected impact of income tax rates "on wheels" on tax reliefs". www.ifo.de. Retrieved 9 November 2021.
  2. ^ Bohanon, Cecil E. (1 December 1983). "The tax-price implications of bracket-creep". National Tax Journal. 36 (4): 535–538. doi:10.1086/NTJ41862549. ISSN 0028-0283. S2CID 232213656. Retrieved 9 November 2021.
  3. ^ "Bracket creep and its fiscal impact". www.aph.gov.au. Parliament of Australia. 29 September 2021. Retrieved 2022-09-16.